The Federal Circuit’s July 9 decision in CLS Bank International v. Alice Corporation did little to alleviate the confusion that has been ravaging the world of intellectual property over abstract patents. The 2-1 ruling found that Alice Corp.’s business methods—involving a process for trading on a computer that uses a neutral third party to ensure both parties follow through on their obligations—were patentable subject matter. This was a reversal of the district court’s decision finding the patents invalid. The Federal Circuit’s decision further muddies the waters around what kinds of methods are patentable.

Here’s what we do know: 35 U.S.C. 101 allows the patenting of “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” The Supreme Court outlined three exceptions to this in its 1980 Diamond v. Chakrabarty decision: “The laws of nature, physical phenomena, and abstract ideas.” The trouble has come with defining just what qualifies as an abstract idea.

The high court provided a little bit of guidance in its 2010 Bilski v. Kappos decision, which allowed for the possibility of patenting business methods and said that the machine-or-transformation test is not the sole test to determine whether subject matter is patentable (see “Testing Tools”).

The scratching of heads began anew when the Supreme Court released its most recent IP decision, Mayo Collaborative Services v. Prometheus Labs. The court found that a method for administering drugs to patients was not patentable and said that a patentable process must contain “elements, sometimes referred to as an ‘inventive concept,’ sufficient to ensure that the patent … amounts to significantly more than a patent upon the natural law itself.”

Further Limitations

In Alice, the majority and the dissent agreed on two points, says Janelle Waack, a partner at Novak, Druce & Quigg. “One, an abstract idea is not enough to make it a patentable invention. Two, merely implementing an abstract idea on a computer is not enough. I don’t think there’s any disagreement on those two points.” There has to be a further limitation to make the method patentable.

“Contrary to Alice’s argument … the fact that computer systems are ‘machines’ does not end the inquiry,” the majority wrote. But digging deeper, the court found that the use of “shadow” credit and debit records, or mock records, as part of the trade was enough of a limitation and that the records “do not appear to preempt much in the way of innovation.”

However, the dissent did not find that argument convincing. “That is not a limiting feature at all,” dissenting Judge Sharon Prost wrote. “Any financial intermediation would in one way or another use a ‘shadow account.’”

Shadow records aside, the majority decided that Alice’s business methods were patentable because it found them to be a specific application of a broader abstract idea, one that didn’t preempt the use of the idea itself. At first read, this seems peculiar, considering that, as Waack points out, “the fundamental basis of the patent system is to allow somebody to preempt others so they can get the benefit of their invention.” But, as the Federal Circuit said, “no one is entitled to claim an exclusive right to a fundamental truth or disembodied concept that would foreclose every future innovation in that art.”

Confused Counsel

Now, in-house counsel have both the preemption element and the “specific application” test to consider when submitting claims that deal with abstract ideas. But even with all the little guidelines that courts have offered, including those in Diamond and Alice, there is still no way for counsel to be sure how challenges to patents will play out in litigation.

In its Alice opinion, the Federal Circuit acknowledged the difficulty of wrestling with this question. “The abstractness of the ‘abstract ideas’ test to patent eligibility has become a serious problem, leading to great uncertainty and to the devaluing of inventions of practical utility and economic potential,” the majority wrote.

“There’s not a bright-line test that can tell me whether a claim is directed purely to an abstract idea or not,” Waack says. “If the Federal Circuit and the Supreme Court haven’t been able to come up with a bright-line test, perhaps this is the best they can do.”

Waack says that in-house counsel should not shy away from presenting claims that are directed toward concepts, precisely because there is so much uncertainty. But adding a computer to an abstract idea isn’t going to be enough to satisfy courts. And if a company’s patent has further limitations on the abstract concept, counsel should proceed with caution.

“It’s hard,” says James Mullen, a partner at Morrison & Foerster. “But short of the Supreme Court drawing a clear line, which they’re unlikely to do, or Congress articulating a clear standard, which they are also unlikely to do, we have lots of litigation ahead of us.”